Are Companies Required to Disclose Chapter 11 Bankruptcies?

While reorganizing a company’s debts under Chapter 11 can have several benefits in the right circumstances, one of the drawbacks of filing is that Chapter 11 proceedings are generally public record. But, even with this being the case, if filing under Chapter 11 is necessary to sustain the company’s operations, this can be a relatively small price to pay. So, does it make sense for your company to file under Chapter 11? Learn about some key considerations from an experienced Miami business bankruptcy attorney:

Publicity and Disclosure Considerations When Contemplating a Chapter 11 Bankruptcy

As a general rule, Chapter 11 business bankruptcy filings are public record. While there are procedures for seeking to seal certain records in appropriate circumstances, the sealing of an entire Chapter 11 bankruptcy case is extremely rare. As a result, in most cases, companies should expect that their bankruptcy filings will be available to the public.

However, this doesn’t necessarily mean that the public will learn about a company’s efforts to reorganize its debts. While some Chapter 11 filings make headlines, most Chapter 11 filings remain largely undisclosed. The creditors involved will obviously be aware of the filing, but otherwise, additional publicity is the exception rather than the rule.

With that said, there are a handful of circumstances in particular where companies’ Chapter 11 filings may come to light. For example, companies may be required to disclose their Chapter 11 bankruptcies if:

• The Company is Publicly Traded – Publicly traded companies will generally be required to disclose Chapter 11 filings as part of their federal disclosure obligations. A Chapter 11 filing will generally be material to both current and prospective investors, and this means that disclosure will generally be required.
• The Company Has Other Affirmative Disclosure Obligations – Certain companies may have other affirmative disclosure obligations as well. For example, franchisors must disclose recent bankruptcy filings in Item 4 of their Franchise Disclosure Document (FDD).
• A Vendor, Creditor or Customer Asks – If a vendor, creditor or customer asks about a company’s bankruptcy history, providing inaccurate or misleading information may constitute fraud. Depending on the circumstances, this could expose the company to liability for damages, contract rescission or other remedies.
• An Existing Contract Requires Disclosure – In some cases, companies may have obligations to disclose bankruptcy filings under existing contracts as well. If a commercial contract includes a representation that the company will disclose any bankruptcy filings, then failure to do so could constitute a breach or default.

Prospective creditors may also independently research a company’s bankruptcy history. Since bankruptcy filings are generally public record, creditors can search court databases for information about prospective debtors’ filings.

Should Your Company Consider an Alternative to a Chapter 11 Bankruptcy?

If publicity or disclosure is a concern, it will be worth considering the alternatives that are available (companies that are considering a Chapter 11 filing should generally consider potential alternatives as well). The following are examples of potential alternatives to a Chapter 11 filing that will not result in the creation of a public record:

• Forbearance Agreements and Informal Debt Restructuring – In some cases, companies may be able to enter into forbearance agreements or informally restructure their debts outside of the Chapter 11 bankruptcy process. When taking this approach, companies can choose the specific debts they want to target—and they can do so with a systematic and strategic approach.
• Renegotiating with Vendors, Creditors or Customers – Renegotiating with individual vendors, creditors or customers may be an option as well. If a company can reduce its monthly payments, speed up customer payments or take other steps to improve its cash flow, a formal debt restructuring under Chapter 11 may not be necessary.
• Internal Corporate Restructuring – Sometimes, companies can improve their cash flow by making internal changes as well. By reallocating resources, streamlining their operations and conducting reductions in force, companies may be able to improve their profitability or free up the funds needed to meet their monthly debt obligations on an ongoing basis.
• Assignment for the Benefit of Creditors (ABC) – While an assignment for the benefit of creditors (ABC) may be an option in some cases, this is primarily a tool for winding up a business’s affairs. As a result, while it is worth mentioning ABCs when putting all options on the table, an ABC generally will not be a viable option for a company that is considering reorganization.  

However, while these options generally will not result in the creation of a public record, companies may still be required to disclose their pursuit of these options for one or more of the reasons listed above. As a result, when considering the options that are available, it is important for company owners and executives to ensure that they are giving due consideration to all pertinent concerns and making informed decisions based on the totality of the circumstances at hand.

What Are the Likely Practical Implications of Disclosure?

In this same vein, along with assessing the potential for disclosure, company owners and executives should also consider the likely practical implications of disclosure. Is the company planning to seek additional financing in the future? Are customers or shareholders already aware of the company’s financial distress (and could they potentially see a Chapter 11 filing as a positive sign)? The answers to these types of questions will also be relevant to the decision on how best to proceed.

Ultimately, as with all business matters, company owners and executives must make a sound and strategic decision based on the information that is available to them. If you need to know more, we invite you to contact us for a complimentary consultation.

Schedule a Complimentary Consultation with a Miami Business Bankruptcy Attorney at Edelboim Lieberman

If you need to know more about the considerations involved in deciding whether to pursue a Chapter 11 bankruptcy, we invite you to get in touch. To schedule a complimentary consultation with a Miami business bankruptcy attorney at Edelboim Lieberman, please call 305-768-9909 or contact us confidentially online today.